Sunday, April 10, 2011

Impact of Electric Vehicles on oil consumption

Green crusaders have long offered a scenario where electric vehicles would diminish the burning of fossil fuels. Other analysts have suggested that the impact on oil consumption will be negligible because of limited driving ranges for all-electric vehicles.

A Reutersreport by Fang Yan and Jacqueline Wong quotes the Shanghai Securities News. The News says that China is increasing from 13 to 20 cities the participants in a pilot program to subsidize the purchase of clean energy public transport vehicles. The report also says that a new program will be unveiled shortly to pay purchase incentives to private auto buyers amounting to approximately $8,800 for pure plug-in electric vehicles, approximately $7,300 for plug-in hybrid vehicles and about $440 for traditional hybrids. China had previously announced a program for incentives in five cities. Nothing is indicated about the geographic extent of the new program.

Kate Mackenzie (ft.com) reports that JBC Energy estimates that China's passenger fleet will be 9% electric by 2020. If the auto fleet were to increase to 15% electric, they say this will reduce China's petroleum demand by 200,000 barrels/day (7.5%).

It is conceivable that cities around the world could ban combustion fuels (ICE) for transportation within their limits, creating a two tiered transportation system: electric only in cities and a mixture of electric, hybrid and ICE in non-urban areas. Such a development would definitely impact demand for oil.

Incidentally, Daniel Indiviglio at The Atlanticreports that the 2010 production of the Nissan Leaf has sold out in 35 days. The first 13,000 cars will be available in December. The Leaf has a 100 mile range between charges and has a starting price around $25,000 after tax incentives. Nissan expects to sell 500,000 Leafs by 2013.

The status of the Chevy Volt remains in flux. Initially targeted for sales in 2010, it now seems likely that it may not be available until 2011. Earlier this year it was expected that the Volt would be priced in May. Today is the last day in May and there is still no announcement. The pricing may not be fixed until fourth quarter. Speculation has put the price around $40,000 ($32,500 after federal tax credit). This is not very competitive with the Leaf, but the Volt is more like a hybrid, with an onboard generator (gasoline powered) that extends the 40 mile electric only driving range to 640 miles using the generator. For someone who needs only one vehicle, but would be forced to use two to cover longer trips, the cost of a Leaf (for local driving) plus another vehicle (for longer trips) would be considerably more than the $32,500 for the Volt. For someone who uses two cars anyway, the Leaf may make sense.

Ultimately, the Chevy Volt will compete with the Toyota Prius, starting at $22,800, and the Honda Insight, starting at $20,050. The Prius is no longer eligible for any tax credits, but there may still be credits available for the Insight, driving that cost even lower. The $10,000 to $12,000 plus price differential could impede market acceptance of the Volt. There needs to be fit and function for the Volt to make it competitive with the Toyota Camry and Ford Fusion hybrids. Even then, the Camry Hybrid ($26,150 base) and the Ford Fusion ($27,950 base) are still cheaper than the projected incentivized $32,500 base price for the Volt. The actual base price for the Ford Fusion hybrid will be less than mentioned as long as the federal tax credit incentive lasts. The Camry hybrid is no longer tax credit eligible.

One potential advantage for the Volt design is the ease of conversion of the generator from ICE fossil fuels to hydrogen compared to converting the hybrid drive systems. However, the implementation of hydrogen fuels is too far in the future to have any impact on purchase decisions for 2011 and 2012, and probably for a few years after that.

In conclusion, electric vehicles may impact demand for oil, depending on many factors discussed in this article. This impact does not appear to be something that will have significant affect in the next 4-5 years. By 2020, maybe. The future of electric vehicles will depend on policy actions by governments, innovation and development yet to occur and how fast the price of oil rises.